Stock Analysis

Gamuda Berhad (KLSE:GAMUDA) Has Some Difficulty Using Its Capital Effectively

KLSE:GAMUDA
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If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at Gamuda Berhad (KLSE:GAMUDA), we've spotted some signs that it could be struggling, so let's investigate.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Gamuda Berhad is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.021 = RM273m ÷ (RM19b - RM6.2b) (Based on the trailing twelve months to January 2021).

Therefore, Gamuda Berhad has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Construction industry average of 6.2%.

View our latest analysis for Gamuda Berhad

roce
KLSE:GAMUDA Return on Capital Employed June 12th 2021

Above you can see how the current ROCE for Gamuda Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Gamuda Berhad here for free.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Gamuda Berhad, given the returns are trending downwards. About five years ago, returns on capital were 4.3%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Gamuda Berhad becoming one if things continue as they have.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 33%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 2.1%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

Our Take On Gamuda Berhad's ROCE

In summary, it's unfortunate that Gamuda Berhad is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 24% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Gamuda Berhad (including 1 which is a bit concerning) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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